Trade Advisory Newsflash

On 28 August 2020, China's Ministry of Commerce (MOFCOM) and Ministry of Science and Technology (MOST) announced updates to the Catalogue of Technologies Prohibited or Restricted from Being Exported. The updates have added certain technologies in areas such as gene engineering, additive manufacturing, artificial intelligence, cybersecurity, and aerospace.

The Catalogue, which was last updated in 2008, is prepared and updated by MOFCOM and MOST based on considerations such as the national security and public interest. The updates become effective as from the date of announcement.

Background
Under China's export regulations, the export of technologies encompasses all forms of transfer including the outright sale of technologies and licensing the right to use technologies. The Catalogue lists technologies that are completely "prohibited" from being exported, and those that are "restricted" from being exported subject to government approval prior to exportation. For each technology, further "control points" describe the technological content that is prohibited or restricted.

Updates to the Catalogue
The adjustments generally reflect the development of technologies over the last 12 years. For example, four items have been added to the list of restricted technologies in the fast-developing computer services sector, which are password safety technology, high-performance detection technology, information defense technology, and information countermeasures technology. In addition, several emerging technologies, including artificial intelligence (AI) interaction platforms, speech recognition and evaluation technologies, and data analytics-enabled personalized information push services, have been added to the control points.

In total, the updates affect 53 items in 17 sectors, which are summarized below:

Comments
In our observation, businesses tend to pay less attention to the export control requirements on exports of technologies rather than goods. Some companies may be unaware that they have exported prohibited or restricted technologies. Such violations may subject the exporter to warnings or penalties, suspension or revocation of the licence to conduct foreign trade, or even criminal sanctions in serious cases.

Even if aware of the export control requirements, some companies could be unfamiliar with the export licence application procedure, which could delay the schedule of any relevant business transactions. In fact, a company that plans to export technology under a "restricted" category must request the local government to grant an initial approval by issuing a letter of intent before the relevant agreement may be negotiated. After the letter is issued, the negotiation and conclusion must be completed within a timeframe specified in the letter; otherwise, another request must be made to the local government to issue such letter. Furthermore, the interpretation of relevant laws and practice could vary depending on location and certain local governments may adopt a stricter position in granting such approval, which could prove challenging for the exporter.

With regard to value-added tax (VAT), certain exports of technology may be exempt from VAT or zero-rated for VAT purposes. However, the tax authorities may request an exporter to provide the relevant export approvals for the transfer of restricted technologies and, if the exporter has not obtained such approvals, the exemption or zero-rating would be denied.

Businesses should carefully assess whether they have technologies that are prohibited or restricted from export according to the updated Catalogue, and, if so, determine whether their business plans involve the transfer of such technologies to foreign jurisdictions. In addition, businesses should improve compliance controls for the export of technologies and make any necessary adjustments to their business plans. With the rapid development of science and technology, MOFCOM and MOST will continuously assess the need to update the Catalogue. Meanwhile, the latest draft legislation on export control was published in June for public consultation. Businesses should closely monitor any legislative developments that could affect their export compliance matters.

Deloitte team is able to provide the following professional assistances to businesses to address the potential impact of the change:

• Assist in reviewing import and export compliance management strategies to adapt to regulatory updates (e.g., assist to design evaluation questionnaire and establish evaluation process for controls over technological items);
• Assist in assessing different business scenarios, identifying the activities of technology transfer; and assist in customizing the company's compliance management strategies and control points to improve trade compliance management program;
• Assist in contract filing and license application (e.g., assist in preparation of submission materials, communication with local authorities, etc.);
• Provide training sessions or insights on trade compliance for management team and operation personnel; and
• Assist in reviewing, revising or updating trade processes and automation solutions in accordance with regulatory updates.
  

We will continue to follow the legislative and regulatory developments and provide you with relevant updates and comments.

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